• Policy Development By Panic

American taxpayers should not read anything into today’s stock market supposed reactions to the President's verbal and policy attacks on banks. Markets have little to do with realities of the broader world and its economics. The Presidential attacks, however, should be very troubling to taxpayers for more profound reasons.

Obama is vociferously attacking “risk taking,” that very human characteristic at the heart of America’s success. Observing his address, it is evidently something he doesn’t have a good grasp of. It is also very, very obvious that the President does not understand business, or economics, even at their simplest denominations. The economy and its future progress is very dependent on risk taking.

This post has written repeatedly against the abuse by Wall Street, and has called for the re-instatement of “the Glass-Steagall Act (except as it pertains to the Fed) that was for the most part repealed in 1999 eliminating the restrictions of affiliations between banks and “investment banks,” … and don’t listen to any bankers who tell you different with stories about diversification reducing risk, or banks being completely capable of regulating themselves.” There is no need for knight-on-horse-saving-the-day-grandstanding. Congress should restore the act, but in the meantime, we can sit back and enjoy the theatre as the President shows us how to distinguish market making from proprietary trading within the banks.

Obama’s rhetoric of new populist policies against banks, comes across as a simplistic attempt to flirt with what he thinks is Main Street’s perception of banks. This also smells of the disingenuous, given this Administration’s early actions during the “bailout” debacle, that gave so much credence, and amperage, to the too-big-to-fail idiocy. It obstinately, and uncomprehendingly, provided hundreds of billions for the creation of financial behemoths. No preconditions were established, nor were any strings attached to the money. Wall Street played with this Administration, as it did with the Bush Administration, and helped itself to taxpayer-borrowed cash. This President should be taught that failure, big or small, is part of the long road to both personal and business success.

Contrary to Obama’s claims, the financial meltdown was NOT caused by the reckless abandon of speculative bankers mired in greed. It was the direct result of cheap money from The Fed, being pushed onto consumers with little, or no credit, by a Congress, which believed in the mantra, “everyone should own a home.” If anything, we would like to hear about some reigning in of Fannie Mae and Freddie Mac, . . . just for starters. The greed which drove the likes of Goldman Sachs, Morgan Stanley and City Bank beyond the fringes of ethical boundaries was not the root cause of the disaster the world is now burdened with.

Obama’s attack on banks is a knee-jerk reaction in response to the devastating Democrat loss of the Massachusetts Senate seat this week. This breathes the fragrance of panic. The President evidently has no idea how to approach the most important concern on the minds of his constituents – stimulating the creation of jobs. He should stay away from teleprompters for a few weeks, and educate himself on the workings of businesses, and the economy. Then he should surround himself with advisors who have actually managed a wide variety of successful enterprises. The result should then be a speech, without teleprompter, impassionedly promoting American business and ingenuity to the national and international community.

What America will definitely not need is a lecture on what its core values should be.

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• America, End Your Fear Of Wall Street

Few Americans have the time to educate themselves on the operations of those who control the most critical elements at the heart of the Nation’s well being. The Kings of Wall Street have long coveted the absolute supremacy they now enjoy over the largest economy in the world. Their road to ascendancy has been long and methodical, but with the collapse of the mortgage and equity bubbles, the past year’s actions by those pillars of persuasive absolutism on Wall Street confirm that their dominance is unprecedented in American history.

A vast majority of Americans must have been astounded by Bernanke’s recent response to Congress’s request that the Government Accountability Office (GAO) audit the Federal Reserve’s financial transactions and assets. The following was the heart of Bernanke’s response, “… auditing ... would be highly destructive to the stability of the financial system, the dollar and our national economic situation.” The GAO is a legislative branch agency organized under the U.S. Congress. How is it possible that Bernanke would have had the guts to tell Congress to go fly a kite? This is the same Federal Reserve whose power Obama wants to expand? Does he really have a good grasp of the true nature of Wall Street and the functions of its insiders? Perhaps the $14 million he received from Wall Street bankers, investment firms and securities brokers during the election campaign are clouding his perception.

Bernanke not only screamed an emphatic, "no," but he had the gall to threaten Congress and the American people with economic destruction. How is such arrogance and power remotely possible? While it might be tolerated if coming from the oval office, it should not be tolerated from a banker. It is also, for anyone who is watching, an obnoxious affront to the Constitution as articulated in Article I, Section 8, “The Congress shall have power to … coin money, regulate the value thereof, and of foreign coin, and … to borrow money on the credit of the United States.” Does this resemble anything we have witnessed during the past year? Not remotely.

Through a century of market ups and downs, interest rate fluctuations, mergers, acquisitions, political influence, lobbying and positioning insiders to the most powerful government and government related institutions, the Kings of Wall Street have nurtured and advanced their isolated power to a point where they are responsible to no one. After the Fed created hundreds of billions in bailout dollars to purchase unaudited toxic waste from its “friends,” these same friends paid themselves billions of dollars in bonuses. These were billions more than the amounts they distributed to their own shareholders, and the rationalizations were as asinine as the bonuses. Obama’s wishful thinking and promises of “oversight and transparency,” over trillions of Fed dispensations, have long been attenuated by the dissonance of fear. Stating that the Fed and Wall Street’s autonomy is complete, would be a gross understatement.

When Bernanke told Congress and the world that if AIG was not bailed out, the international economic order would come tumbling down, did the majority of his listeners believe him? Absolutely. Panic was being incessantly pounded into the public’s consciousness. Unless a handful of senior players from the banking sector didn’t get their way, the underpinnings of the global economy would disintegrate, and the world as we knew it would come to an immediate halt. Paulson chanted the refrain, and shortly thereafter so did Geithner, whose performance made sure that the message was delivered with the requisite amount of perspiration and earnestness accentuating the urgency. Above all, he underscored the fear.

Individuals, who could not care less about the health of America, just as they never cared about their firms’ clients, control the economic engines of this country. Their egos dictate their actions, and satisfaction of abnormal greed is the compelling priority. The details of the business, and its legalities, … be damned. Have we forgotten that when Lehman Brothers collapsed overnight, no one knew there had been a problem? None of its executives were familiar with the extent of the calamity when it hit their firm, nor did their books indicate where assets might be hiding or what claims might exist against them. Transparency? Due diligence? Forget being a shareholder looking for information since the senior executives, the CEO and the Board of Directors were oblivious. Was there any conscious human being near the top of the Lehman ladder who cared enough to raise doubts? Would he or she have been listened to? Not likely.

When you are too preoccupied picking out the leather for your new executive jet, or refurnishing your third mansion in Cap D’Antibe, you don’t have time to spend on corporate incidentals such as the details of an audited financial statement. Even if there had been a spare moment, you’d have to fly to that Bridge tournament in Chicago, … or some other urgent pastime where your “friends,” or your ego expect an appearance.

There is a culture of omnipotence that has been very pervasive throughout all of Wall Street’s major firms during the past two decades. It has reached a level of absolute and supreme potency within a few of its more majestic mindsets like those at the top of firms such as Goldman and Morgan. These firms have by design created complex webs of interwoven corporate entities, crossing geopolitical borders with questionable practices beyond the boundaries of laws and oversight. Theirs has been a comfortable ride, since there is no will on the part of any government to provide intrusive oversight to the investment banking giants, therefore effective oversight is simply an ephemeral, wishful thought on the part of a cornered public.

The Morgan Stanley acquisition of Bear Stearns with a $30 billion taxpayer guarantee was a sweet gift handled between the boys, with little evidence of hard-nosed negotiating on behalf of American taxpayers. Obviously, reasonableness also never entered the room. Bailouts for Citigroup, AIG, Bank of America, Citigroup, and AIG were negotiated between friends, some friends only pretended to be working on behalf of the American taxpayers. When Treasury, The Fed and the heads of the major Wall Street firms, particularly Goldman Sachs and Morgan Stanley, came together to make deals, their actions were not “negotiations” as defined in any normal dictionary. Who really represented taxpayer interests? No one. The Third Side, the taxpayer who will foot the major risk, was not in the room. Not only were taxpayers not in the room, but they were also swindled. There is no other way to describe the one sidedness of the structures that taxpayers were handed.

Taxpayers recapitalized banks under insanely bad terms and conditions, where they unwittingly guaranteed toxic asset, as occurred in the Citigroup bailout or when B. of A. acquired Merrill Lynch. Did anyone question B. of A.’s use of TARP funds to “acquire,” competitors? No-one representing taxpayer interests seemed to care, and quite to the contrary, Merrill’s losses were purposefully concealed from both investors and regulators. Did anyone negotiate hard with these banks, B. of A., Goldman and Citi, when as creditors to Chrysler, they forced its destruction instead of allowing the government to provide it with deals as sweet as the ones they had received themselves? Not much. Geithner and Bernanke were evidently not close friends of any Chrysler executives or employees residing in Detroit. They were, however, friends and colleagues of Wall Street.

We have written elsewhere on this post about Too Big To Fail, however, with the taxpayer’s willingness (through inept government) the crisis has created ever-larger monsters on Wall Street. America’s vast banking system has become weak and remains weak other than for those at the top of its food chain. The controlling players have not changed, and the economic contraction will continue. We have become numbed to the fact that when banks fail, the public pays. A few companies, under the aegis of a small band of individuals created the perfect environment for the implosion of the banking system through massive risk taking. Congress cheered actively from the sidelines. The Wall Street hands that were in large part responsible for the crisis now dictate government actions, and have effective control over the public purse. In the meantime, the Fed, standing squarely on the backs of all taxpayers, is doing the job of large banks that still refrain from injecting credit into the economy.

While megabanks trade publicly, there is a dearth of verifiable, or incisively auditable value that can be placed on them since it appears none of their executives know the extent of the worthless paper lurking deep in their bowels, and none of them would tell you if he knew. Admitting the size of the toxic assets would require enormous write-downs, and would affect their bonuses as well as the values of the company shares.

We should not get swayed into believing that Too Big To Fail is simply a remote concept dealing with enormous corporations with global reach. Too Big To Fail refers to individuals at the top of these financial giants with all of the substantial power that the companies they manage can wield. Too Big To Fail encapsulates the stupidity that brought the world to the brink of collapse. We are just a couple of mergers away from a global financial power that will be impossible for any government to regulate, although regulation already seems nonexistent for any of the current top players on the Street.

The markets are technically driven and managed by systems that maximize profits for those who control them, using technologies that very creative talent produced. There is no ceiling to that creativity, and no end to what might be done to restructure the financial underpinnings and superstructure of the nation’s economy. The talent is available, and all that is required is willingness to do so. Constitutionally there are possibilities, but relinquishing control over money is not an alternative Wall Street will readily agree to, yet, reversing the process is within the purview of Congress.

The key to minimizing the future damage that the kings of Wall Street might further inflict on the Nation is to bring their power and influence into the realm of reasonableness. This means bringing their propensity for size to within reason for any organization involved in pure “banking,” and focusing their attention to providing large and small companies with the services, particularly credit, which they require to remain open for businesses.

There is a lesson to be learned from the current debacle, while the window remains very clear, and before time and retrospect blur the current reality into a distorted sequence of lies as the months advance. In order of priority, the following should be considered for a sound America going forward.

1. Take back control of The Fed. Humans will be human therefore there are no guarantees that the people’s representatives will act with foresight, however, they will accountably serve under the canopy of transparency, and due diligence, rather than submit to the beck-and-call of those whose billions in annual bonus money stagger the imagination.
2. Take back control of money.
3. Segregate “Banking,” from “Investment Banking,” and everything else that seems to attach itself to the once-upon-a-time credibility of banking. Reinstate the Glass-Steagall Act (except as it pertains to the Fed) that was for the most part repealed in 1999 eliminating the restrictions of affiliations between banks and “investment banks,” … and don’t listen to any bankers who tell you different with stories about diversification reducing risk, or banks being completely capable of regulating themselves. We have seen the evidence. One very intelligent provision contained in the act is section #32 that prohibits banks from having interlocking directors. Such decree could well be applied to other industries where “Board of Directors,” has simply become an incestuous and corrupt exercise.
In the same process, throw out that brilliant piece of Congressional ingenuity called the Gramm-Leach-Bliley Act.
4. Cap the size of banks so that their executives more naturally demonstrate concern for soundness of lending decisions, and the well being and success of their regional customers. Banking should be a service, and should not be a casino where the management can pilfer the till as has been repeatedly demonstrated wantonly by the major Wall Street firms.
5. Allow the FDIC to do its job, and instruct it to play serious hardball with the risk takers who come into its line of sight.

This is not minor tweaking of the system. This is also not a call for the establishment of a consumer protection agency to police all things financial from credit cards to mortgages. Common sense dictates implementation of a structural reconstruction. The proposed Consumer Financial Protection Agency would only be an ill-defined expansion of the government payroll, proliferating government reach into more corners of society. This make little sense since there are agencies already entrusted to protect consumers which are not doing their jobs. Proposing the launch of such an inappropriate meddling amoeba is evidence of government ignorance of the realities on Wall Street.

America, your government is lying to you. You’ve been had, and are being had. It has no idea what is going on with your money. Those few bureaucrats who have ensconced themselves in positions of unnatural power and influence, and who manage the joystick, won’t tell you the truth. Even more pathetic is the fact that neither Congress, nor the President, know enough about the mechanics of America’s economy to apply practical judgment decisions in the refashioning of the system, … nor, it seems, do they have the will to act. Considering the fact that the current administration continued the trend of installing those who had a healthy hand in packing the powder keg that ignited into the economic disaster now encumbering the nation, we cannot expect much change. The billions of dollars that politicians received from Wall Street over the past decade through campaign contributions and lobbying, was insurance on their continuing silence, and stifled any burgeoning ethics.

Taxpayers have become disillusioned by the abuse they have endured at the hands of special interests, and the lack of intelligent, common sense response from their elected officials. A broad swath of the electorate is wearied. Congress should pay attention to 2012, and the electorate should demonstrate a little selfishness. Taxpayers should look for some creative thinking instead of the tired old nursery rhymes dispensed from portable pulpits.

Banking is not a magical, abstract, or obscure foreign art, although some of the fringe elements have become complex by design, such as the proliferation of derivative financial instruments. Government is protecting special interests and is NOT forcing a restructuring of America’s financial system. Taxpayers should demand that capitalism be reinstated back into the banking system. They should demand that Wall Street’s power elite end its mortgaging of the American future. Taxpayers should ignore platitudes and bromides from Obama and Congress, and they demand a break-up of Wall Street’s major players.

Taxpayers should be lining up in the next elections to install individuals into Congress, no matter what party they might represent, who will take back control of the most important components of the economy, and ensure that the country has a chance at a sound future. The electorate should not allow the continuing concentration of financial power to accumulate in fewer and fewer irresponsible and egocentric hands.

Take control back from Wall Street, demand transparency, and quit bailing out firms that should be allowed to fail. Stop being mesmerized by the pretense and illusion that was perfected under Alan Greenspan. Take back control of the money supply before another crisis turns a struggling economy with escalating debt, into a long term depressed economy.

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• Government Capping Compensation?

As you shelter yourself in a cool closet from the hailstorm of healthcare promotion, Congress and the President are sliding into home plate with compensation controls in the senior offices of financial firms, … for starters. The new Corporate and Financial Institution Compensation Fairness Act will provide no other than the SEC with the ability to establish the rules on how executives are paid, and will enable government agencies to effectively control the “inappropriate risks,” practices of financial companies. Institutions with less than $1 billion in assets will be exempt. This further intrusion into the fiber of corporate America by those who have completely failed in carrying out their responsibilities to the electorate is another misguided kneejerk reaction.

This bill will empower government bureaucrats to control compensation plans that will threaten the safety of financial institutions, or adversely impact economic conditions or financial stability. Have no fear, the newly hired experts will figure this part out, what it means and how to implement it, and they will diligently look after your interests.

There’s hope, however, with some minor good news in this bill that resides in its provision for procedures for shareholder approval of golden parachutes. What this portion of the bill looks like in final form will dictate whether or not it makes any sense, but in the meantime, three cheers for the crumbs thrown at demands for common sense. We shall not hold our collective breath. Another clause that might have provided teeth in a corporate structure fix was the providing of a voice to shareholders on executive pay. It failed miserably in its final form, since the shareholder vote on executive pay will be non-binding, therefore will leave shareholders where they were before, … “we’ll tease you with a little influence on the company you own, but, … naah, just kidding, get lost and go back to your trading screens.” Shareholders, large and small, should have greater influence on the proceedings of the public companies they own, and such influence should be addressed at the Board of Directors level. The government is not improving the lot of shareholders, but is escalating its own intrusion into the boardrooms of America.

We should remember that this is the same Administration and Congress that couldn’t even track the bailout money, or put strings on the money to restrict it from getting dished out in the form of bonuses. This is also the government that threw those billions at financial institutions on the pretext that they had to be bailed, to avert a depression, yet no one in government could tell you where that money actually went. So how was it, exactly, that those bailout billions were allocated? The toxic assets could not be defined or audited, which means that the fear mongering and threats were outright lies. Wall Street skunked this Administration, as well as the last one, and as a result a colossal extortion of the taxpayer was allowed. Did anyone making these horrendous decisions ask the hundreds of thousands of businesses from coast to coast what their banking preferences might be? … Would you rather deal with a gigantic-too-big-to-fail-market-dominant bank headquartered in New York, or a medium or smaller sized regional bank? When did “failure” get expunged from the dictionary of American Capitalism?

Government intervention has reduced competition in the banking sector, allowing the favored few bailout-receiver-therefore-government-backed behemoths to attract investor support, and has enabled their acquisitions of not so fortunate competitors.

All of this frenzied government activity pretends to be response to the outrage against some of the insanity exercised by some like AIG, Goldman Sachs, and Morgan Stanley. The $11 billion plus, awaiting the bonusable at Goldman should soon make for incendiary fireworks, and support the government cause. Using public anger as cover to implement invasive measures is rather expected from a government that has failed to acknowledge or accept any responsibility for the environment that incubated the bubble which burst into a recession. Giving more power to vehicles such as the SEC for example, reminds us of the abject incompetence the SEC demonstrated through the economic extravagance that allowed Wall Street the power and influence to exploit, and then erode, the financial health of the Nation. Did the SEC also not have a front row seat to Bernie Madoff’s implementation of an extensive 40 year long grotesque personal compensation program?

Sweeping expansion of government incompetence into corporations is an invasion that will not be reversed. Other more intelligent policies should be considered instead of launching clusters of bureaucrats to invade company offices in all corners of the country. One could consider implementing laws against monopolies, but it would be more effective to start with segregating the large banking institutions into more pure line of business sectors. It really comes down to reinstating certain portions of the Glass-Steagall Act that was repealed in 1999. Hundreds of millions were expended by the large banking institutions to achieve the repeal of the Act, therefore a reversal would be very difficult. Given the present climate of Washington dependence on Wall Street cash, even “difficult” might be a stretch, however, such reinstatement would bring back some peace of mind to taxpayers in the long-term.

The critical functions provided by undistorted banks operating within narrow guidelines should be reconsidered. The contamination of many banks over the past decade, with the annexation of such things as brokerages, and the underwriting or trading of complex securities, should be reversed. Government should direct existing oversight bodies to perform their duties, including the enforcement of laws dealing with asset requirements, capital ratio leveraging, and lending guidelines. Then, government might provide shareholders with more teeth to bite when necessary, and leave them to rule over freshly formed and more independent Boards of Directors.

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• The Deal To Make With Madoff

The icon embodying our generation’s perception of the more extreme and baser elements pervasive on Wall Street will receive a sentence this summer that will extend far beyond his life expectancy. The devastated thousands of sources that rendered up the $65 billion Madoff fraudulently appropriated will not be satisfied. Neither will society’s need for necessary corrections of the system that continues to sanction thievery.

The mainstream media suggests that his 11 felony counts should spread like shrapnel to his wife and kids, and to his associates. Madoff stated in court that the businesses they ran were, “legitimate, profitable and successful in all respects.” The importance of this court delivered statement is not what he said, but what his claim reveals of the prosecutorial shortcomings in his case. Evidently the prosecutors have not effectively extracted the most important information from this well-connected and very effective scoundrel. Madoff is under no obligation to cooperate since he has no deal with the state. The prosecution attempted to extract admission of conspiracy from him. This accomplished nothing, and his lawyer indicated that Madoff has accepted the fact that he will die in jail.

We have previously written on this case with The Madoff Letter, however, with Madoff’s pleading concluded, we feel strongly that prosecutors should move to make him an offer that will render a maximum of the dispersed capital back to the original investors, and surface a majority of the co-conspirators hiding far beyond the circle of the Madoff family. Most importantly, an effective deal would bring the implementation of wide-ranging fixes to the regulatory cracks that continue to enable such broad abuse on the Street.

To successfully achieve these objectives, let’s set aside the public fury calling for blood, and attempt to extract the highest possible benefit to society. The prosecutors may in future use his family as leverage in extracting information from him, however, with his guilty plea, Madoff has made this unlikely in the near or mid-term, and such efforts could take many years to resolve. Time will work against the prosecution in bringing satisfaction in these cases, and the last thing they should wish for is that harm comes to Madoff in prison.

Going after his family might satisfy emotions, but as such a process evolves through years of judicial wrangling, it will provide little of real value toward the principal objectives. Given that he has accepted his fate, the justice system should make Madoff a deal that would provide him some faint hope before he dies. Give him the prospect of spending some free time with his children and grandchildren before his days are over.

If billions of dollars are recovered from offshore accounts, from foreign feeder funds, and from an endless list of individuals who catered to the Madoff cash collection by accepting kickbacks, does it matter if Madoff once again sees daylight? If the long list of individuals who conspired gets rounded up to join the ranks of the incarcerated, does the greater good become advanced? If the specifics of regulatory shortcomings, and failures or incompetence of the “overseers,” such as Congress and the SEC, receive unprecedented attention, and correcting legislation becomes enacted, would this not reduce future recurrences of colossal or amorphous frauds? Would the 5,000 people whose lives have been dramatically affected not welcome a significant recovery of their capital? Of course.

Make a deal Madoff will not refuse. Provide Madoff sight of the end of his tunnel. Take ego and emotions out of the equation, and make light deals with each member of his family. Exchange the leniency for a complete and specific unraveling of the past thirty years Madoff spent in the more dubious financial chambers of Wall Street, Geneva, London, Monaco or Singapore. Get all names and amounts. Then go after all of them, extraditing many from the comfort of protective jurisdictions while those countries still need all the financial goodwill they can get, and grab the cash these co-conspirators stashed as you bring them to justice on the streets of New York.

Revenge in this case would not positively serve the society Madoff abused, and he is not likely to atone for his crimes. What matters now, more than retaliation on this former NASDAQ Chairman, is the achievement of some restoration, and salvaging as much as is possible of the destruction rendered by this monstrous crime. Let his dream hold contain a whiff of freedom, as he rests uncomfortably in his new austere surroundings. Do whatever it will take for him to cough it all up.

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• Obama, The Third Tell

Previous articles on this post observing certain “tells,” have hopefully laid useful stepping-stones in the analysis of Obama’s attitude or inclinations towards the nation he leads. The President has just delivered another significant reveal.

During an attempt to turn positive in contrast to his consistent negative affirmations on the economy since his election, Obama said that "profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it.” Whether or not this was a planned attempt to appear reassuring to Wall Street, the statement’s impact was broadly revealing.

Obviously no-one expects that such a “buy” signal from the President will stimulate unfamiliar investors to leap into the markets. If anything, the observation raises concern on his evident lack of familiarity with the most critical elements of the American capitalist system. At the very least he could have taken the time to become familiar with some of the essential vernacular long practiced by the investment community, Wall Street and management of corporate America.

The Dow is down 30% from its election day levels. Although Obama has rushed to stimulate the economy, amplify government presence and government spending, his policies have thus far not found acceptance from Wall Street and the markets. The state of the economy, and its persistence at the top of the priority list, should have provided him some incentive to become educated on the key components of American industry, and the nature of business.

Profit and earnings are usually considered the same thing, therefore the ratio between the two is one. Price-to-earnings ratios on the other hand, have been effective deciding measures used by investors when assessing relative risks inherent in purchasing individual company stocks or baskets of stocks through index funds. The price divided by the earnings through the most recent trailing twelve-month period, provides the P/E ratio, and can easily be compared to that of other companies.

While Obama’s commentary might have been well-meaning, it suggests a general lack of knowledge about profitability and yield. These are the biggest concerns of all business leaders whether they manage large corporations or smaller employers. The success of these companies, their ability to raise capital, and their profitability, will be a source of the much touted, but little defined economic growth that will supposedly result from the stimulus billions. These companies will in future provide a principal source for the cash that will repay the overwhelming debt. Obama will therefore require more than a vague or passing acquaintance with the engines that will enable a return to prosperity, as he leads the charge to inject trillions into bailouts and the so-called stimulus of the economy.

Is this a foretelling of outcomes similar to what we witnessed in the aftermath of Bush’s disastrous decision to invade Iraq? A President completely unaware of all things foreign, made a historically momentous decision to invade another country for still vague or questionable reasons. Are we to assume that in the equally significant decisions that are required when addressing a depressed economy, a complete lack of awareness will somehow surprise us and serve the day with wisdom? Is Obama aware that he absolutely must provide himself a condensed education on the inner workings of small and large businesses?

As we have previously suggested, the 44th President must rapidly acquaint himself with a few fundamental economic elements if he is to become effective in managing the largest economy in the world, and he must absolutely understand inflation, that destructive monster waiting just around the corner. The markets have never been forgiving, and will not likely find comfort where out-of-control spending and excessive debt are the principal measure of the world’s leading government.

The President should also become very inquisitive as to the nature of his nation’s currency, its bonds and its capital markets. On his way to borrowing the trillions of dollars to fund his agenda, he will better understand what he is asking for from the country’s international creditors, and will better comprehend the relative position into which he will be placing his country. Those behind the lending wicket will have little empathy for America’s concerns over currency, national security or trade balances. It is hoped that a little more knowledge will heighten the wisdom during the chastening process of borrowing, and will stimulate the discovery of less expensive paths to economic health. Such appreciation might also provide the administration with some confidence that business and capitalists are not its enemies.

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• You’re Fired. Now, Where’s My Raise?

Today Microsoft announced a shaving of 5,000 jobs internally and a reduction of thousands of external jobs with its contractors or suppliers. This is rationalized by “economic conditions.” Did we read anything about wholesale compensation cutbacks? Not much.

This is not a condemnation of Microsoft, but a statement on Executive responsibility and attitude. Management in companies across this continent, particularly senior management, holds meetings on how and where to cut back roll calls, and diminish hard, non-discretionary costs weighing on the cash flow statements. The purpose of these thousands of meetings in fluorescence filled rooms is first, to save the most senior jobs, and second, to save the most senior jobs. Why? Because they can. Why? Because they’re more senior than the rest. If you are a senior executive in this economic climate you would have to commit evident fraud to get fired. The economy gives you all the rationalization for failure you will ever need, “It’s not my fault, and the economy sucks.”

None of these meetings are discussing the extermination of options from compensation packages. Starting with the CEO on down the layers of each corporate pyramid, each individual has been convinced that options are the way to riches. Middle and lower ranks dream of the day when they will get a taste. Wall Street pulled all of corporate America into its game. Brokerages influence companies through their prejudice of CEOs and Boards of Directors, and as well as through their control of the public trading markets of the companies these executives manage. Employee options are one key to that control. There are other schemes used to control CEOs, however, for the manipulation of the senior crowd, options are a perfect and very effective tool. Corporately, options can be argued to be effective in up-markets. The effectiveness argument looses fervency when options are under water, as is the case for many in the markets we are now experiencing. So why is no one arguing against them as an effective tool in the motivation arsenal? Options don’t work in a down turn. So why use them? DON’T.

Employees, including CEOs, should not be preoccupied with stock markets. Doing their jobs effectively will strengthen the company and that will, or should, satisfy shareholders. Forget the broker. This employee option business is a Wall Street subterfuge and everyone is familiar with the refrains that attempt to legitimize the practice. Any executive hiring a consultant who sings the “equity compensation” song to his board or to the shareholders, should be fired. Their rhyming couplet about, “aligning executive interest with shareholder interest,” is a fraud. Throw them out.

Middle America has been lulled into accepting that those at the top of the corporate food chain know something it doesn’t. Middle America has come to accept that the lofty layer of American capitalism somehow deserves hundreds of millions in annual compensation. The practice should be stopped and all shareholders should demand an end to it. The senior ladder of success should be compensated with salaries and bonuses structured around objectives intended on building the business. Objectives such as growth and profitability. You don’t need a complex algorithm to establish actuals against quotas for sales or margins that could be employed to dictate an employee’s compensation.

None of the above mentioned corporate meetings are having serious discussions on ethics, moral standards, sustaining the human community, or sustaining jobs through the recession by dramatic overall cuts in salaries and bonuses. Have any companies announced immediate 20% pay cuts to the top half of the employee spectrum? Is anyone making over $100,000 in total compensation getting chopped by 20%? Is anyone making over $250,000 getting a 25% haircut? As for anyone taking over $500,000, … hmm, OK, for you maybe we’ll, hang on, ... let’s talk about a loan back to the company, could we? You get the point. Implement major cut backs in salaries and bonuses, and save jobs. You can’t save all, but save as many as humanly possible. This will require an attitude shift in senior management.

Such a strategy would allow people to continue supporting their families, buy food, make car loan payments, and pay their rents or mortgages. I’m not suggesting that corporate America turn into Sally Ann, however, the whole economy needs creativity injected into its limbs if it is to by-pass a depression. Don’t keep positions that are not required or redundant, but most of the employees now being fired were hired for good reason. As markets shrink so too will payroll, but in these times of bailouts, the escalated compensations of senior staffs need revisiting. These senior levels must take compensation diet pills. Big ones. Such therapy can only be prescribed by those taking home the largest piece of the pie. All CEOs should make a visible and public effort to save the rank and file.

The economy does not need to read about any more cuts in work forces, as 3 million already lost their jobs last year, but it really needs to read that you, the CEOs, implemented drastic cuts in compensation. Even if you personally take one cut of $30,000 to save one job, that is a move in the right direction. Each company can do its part. The positive PR will do wonders for your frame of mind, for your company, and most importantly, you will be forever grateful. Really.

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• Bernie Madoff - A Letter Of Explanation?

The Editors of The Pacific Gate Post received an envelope from persons unknown, containing a letter apparently discarded in an alley behind an Upper East Side, Manhattan apartment building. The letter had been crumpled up into a ball and partially torn, possibly having been thrown out of a penthouse window. Its reconstruction was completed and we publish it hereunder, confident that even though it is a piece of fiction, it may contain shreds of clarification on recent economic events.

Dear Friends,

As I sit in my Upper East Side apartment living room, with nowhere to go, I watch the news and read as many publications as I can have sent up. It’s almost like I am observing some other person everyone is talking about. That characterization in the news is not the Bernie I know. I feel an urgent need to clear the air because, I’m not the person being portrayed. This whole thing has been completely contorted by the media. I am not so different from the rest of Wall Street. So please bear with me.

I am under house arrest, and the authorities are even searching my mail. I have more than enough time to contemplate the last 48 years. It’s been that long since Ruth and I formed this business of ours, and I feel bad that the downturn in the economy has been so destructive. I was always a very private man, have never liked public affairs and I’ve pretty well stayed to myself. Although my wife, Ruth, who is also my best friend, dragged me out to functions, I like peace and quiet. I’ve been accused by some of being antisocial, but that’s not the case. I just like being by myself. Just ask her. Even when we go out for dinner, it’s just the two of us. That’s it. She’s very patient with my mood swings, and she’s the best thing that’s happened to me. I prize privacy as much as I despise failure.

I also can’t stand blowhards and the investment business is full of them. Since in the past I did not wish to cast insult on anyone by excluding him or her, Ruth and I mostly stay by ourselves, or with our family. These people running hedge funds and investment banking companies have overinflated perceptions of themselves. Everyone worships them. Hard working Americans think these money managers know what they’re doing, because CNBC, or Barron’s, or the Wall Street Journal tells them they do. I’ve spent my life with these people. I’ll tell you what. They don’t know anything extraordinary, but they’re good at pretending. They don’t produce much, but they get paid more than anyone who actually works for a living.

Let me explain something here. For years I ran a successful business. I was a trader and my goal was to become the most successful fund manager on Wall Street and build the biggest fund on the planet. We did it all. Hedge fund, broker-dealer, trader. We had the latest and best technology, which gave us an edge. Technology was critical. Our software made it possible for me to manage the reports and payouts on the enormous amount of money that were thrown at me. I developed a reputation, a really outstanding reputation. No one could touch me. I had the Midas touch and from Miami to London every money manager running anything bigger than a bingo scurried energetically to attract my attention. I understood the big money boys, and I delivered exactly what they wanted, reasonable and steady returns.

I’ve noticed that some people, who invested with us, now appear indignant and are claiming losses. Such hypocritical behavior is downright pathetic. Ask them how much they made with me, year after year. If they were fund managers or fund aggregators, here’s a hint, check their overseas travel schedules from past years. Check the files of travel agents. They’re full of good news for any investigator worth his salt. When you think of Geneva, what do you see? You probably envision an idyllic, very European city overlooking beautiful Lake Geneva surrounded by the Swiss Alps. For years when I saw Geneva, and a few other cities like it, they were deep wellsprings of cash exchanged for a piece of the action. I am using Geneva as a metaphor here. A metaphor suggesting mountains of cash sitting discreetly in banks and safety deposit boxes around the world from kickbacks or commissions.

Private bankers are guys who manage pools of capital. No one can check how much he or she gets in “kick backs” because there is usually no conspiracy. By that I mean, … there are only two people in the room. That’s not a conspiracy. Just check some of the feeder funds, or the funds of funds, and their deal-maker managers. Not all of them of course, but some. That’s where I started the game for crying out loud. I arranged for others to set up funds, and they fed that capital into my companies. Initially it was just small investment groups, but those snowballs grew, and grew and grew. I became bored with repeating the refrain about my split conversion strategy using both put and call options, but before you knew it, we were raising more money than anyone could invest intelligently.

So many money managers would come with their exasperating questions, and the pretence of due diligence. Some of the idiots who really took themselves seriously even came with forms, asking about trading strategies, governance, compensation and using terms like fiduciary standards or benchmark performance. Like these barnstormers had a shred of any moral standards. These were the same crackbrains who charged their clients millions for “reinvesting” the money elsewhere because they couldn’t run a fund themselves. They are the modern version of snake oil salesmen. Getting them out of my hair was easy. I just made myself unavailable. You want in, give me a check. If not, get out. It worked. They couldn’t wait to hand over money.

The principal key to success for me was “perception.” Great PR is absolutely everything. That’s something my father never had the privilege of understanding. He tried to get into the money game, but had little success. I somewhat fell into the character of the aloof and insulated investment banker by accident. I didn’t want to answer questions about my trading strategies, and even when I consented to meeting with potential investors directly, I kept all meetings short. My aversion to meet, worked wonders and the more I became unmeetable, the more people wanted access. This evolved to the point where people threw hundreds of millions at us, just so that they could get twenty minutes in my office, or so they could be seen having lunch with me. How weird is that? I made sure that I joined the right organizations, which provided me some credibility, but in fact they would end up bragging that I was on their board, or part of their group, or that I was an advisor. Through goodwill, I created a long series of what you might call recursive loops of gullibility that brought me an infinite source of investors.

The games in the investment business may have a few rules but these are just veneer. The complexities that have evolved are intended to circumvent or confuse oversight. How can anyone, even those intimately familiar with trading, catch a trader worth the name who’s front-running, or naked short selling, for example? Unless you’re sloppy, you can get around legal restrictions without detection. Investigators know the game, but they have insurmountable difficulties when it comes to getting hard evidence. Today, volume and technology make illicit trading difficult to detect, yet many people on Wall Street do it. You do what you have to do in order to remain ahead of the next guy. If you don’t believe me, do your own research on how many of the major firms have been fined over the last thirty years with timid slaps of the hand. What they were doing was illegal, but who went to jail?

Loyalty was critical to me, and a central part of my strategy was to make sure that all investors understood unambiguously, if they took their money out of my hands, they would never be allowed back in. As a result, most investors never asked for their principal. If someone invested, we also demanded that they not divulge anything about their investment, or our business. That guaranteed that they would spread the word in hushed voices, punctuating our image of exclusivity. No one can keep a secret, least of all an ego with a pressing need to brag of its admittance into the most exclusive investment club in the nation. They can’t now be accused of gullibility when greed was their motivation.

In the past decade or so our total volume under management created momentum. The size of our volume provided us a perceived ability to affect the markets. Investors assumed that we could manipulate market sectors to our financial advantage. They were willing opportunists and ardent participants, knowing full well that such manipulation would have been illegal. This was another critical element in my strategy. These deliberate and enthusiastic partners in my game asked no questions once they were in. Even people with serious money “don’t want to know” although they might suspect. No one is innocent. As I said, good, effective PR is everything. With the right image everything is overlooked, including what you have or have not done.

How do you think all those salaries and bonuses on Wall Street are justified? Their image. They don’t call it Ponzi, but what’s the difference? Money is vanishing. Why do you think no one is getting any accounting of where the bailout money of the banking industry has really gone? Well over a trillion dollars has mysteriously disappeared into a giant black hole. Bailout money is being used to pay hundreds of millions in bonuses? Is anyone accountable? Oh, sure, Congress pretends it is going to ask questions. That will be about as effective as those questions I was asked by those investors who wanted to understand my bookkeeping. Why so much complacency when there is so much anger at me? Am I just a scapegoat, and the object of venting, that is a necessary relief valve absolving all of Wall Street? All cameras are focused on my front door while taxpayer bailout money is siphoned off to distant islands and yachts not registered in the U.S.?

There has been an assumption about my sons, Andy and Mark, and other family members having participated in my schemes. They worked with me but had nothing to do with it. Nothing. I needed them to take care of our private family interests and our charitable work. That was a central component of the family’s communal focus. My kids turned me in. I asked them to. They just pulled the trigger a little early though, I had some plans for a few days before the authorities showed up at the door. Same goes for my brother, Peter, who has been a loyal associate taking his instructions from me, overseeing our trading operation, but leaving all of the senior fund management alone. He is a lawyer by training, confused by investment strategy as most people are, and he knew nothing about trading and money management.

You will read of endless “trusting” investors having been swindled and you’ll hear their rationalizations. Most of them were just greedy. I also predict that you will read about the closing of hedge funds, and funds of funds over the next couple of years. Their leadership will not be questioned, although their actions were not much different from mine. They will simply slip away into the night. I am proud that I have at least had the decency to step up and take the blame. I decided to plead guilty in order to end the stress on everyone around me. I have taken a giant leap onto my sword, and I have instructed my lawyers to make sure any deal they conclude with the District Attorney is final, and all-inclusive.

People are told, “don’t manage your own money, hire a professional.” Think about that statement. Why is it that money is such an enigma to so many people? Why do they listen to the so-called experts? Why do they persist in asking to get ripped off? Investors continue to place their money in the hands of people they don’t really know. Do you really know an acquaintance? Do you truly know a friend? We barely know ourselves, yet we trust others with our hard earned cash?

I am not like Wall Street, I am Wall Street. Today I will ask my lawyers to see if I can do consulting for the investigators and legislators. I know this game. I could be the best thing that’s happened to cleaning up The Street in a hundred years.

Sincerely,
Bernie

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• Is Madoff Really A Wall Street Anomaly?

As if the negative news of the past month was not enough to rattle the constitutions of the hardiest bank accounts, a new face has appeared to erase Paulson’s from principal and front-page news coverage. The new face of Wall Street’s meltdown is Bernard Madoff, a well-respected, elusive, disarming, egocentric, and now arrested, financial service executive. Is he really such an anomaly?

Individuals, banks and fund managers of brokerage, hedge, trust, private, non-profit or other capital pools, who made sumptuous donations to Madoff’s coffers are making the headlines for having invested in the genius of 1% to 1.5% monthly returns. Over the coming days and months names will continue to emerge, and so will the dearth of ethics. It is inevitable that some of the nastiness permeating the penumbral netherworlds of investment banking will force the hands of authorities that have ignored many of the egregious abuses of fiduciary responsibilities entrusted in positions of influence and power over money. Wealth destruction of such magnitude required servility and assent from a synchronous multitude.

In the Madoff fiasco, the range of investors already finding light of day includes for example Banco Santander based in Spain with a reported $3.1 billion exposure, and Britain’s Man Group with only $360 million in potential losses. Individual fund managers and financial advisors to the wealthy will also be exposed. For some individuals the nature of the exposure may be more than simply having lost staggering amounts due to their inappropriate allocation of capital to an alleged ponzi scheme.

We may be bestowed the first significant opening to a flood of exposure into the imposture and pilferage that has been too pervasive in the investment and banking industries for a century. It is an industry that has been protected with almost ecumenical solemnity by regulatory agencies and media. Regulators might not be up for it and MSM may be too distant from privacies of collusion. Nevertheless, the doors of the cloisters shrouding indefensible vulnerabilities may open a crack. Perhaps we will be granted insight to a whole range of shamelessly aberrant possibilities that the financial world and its regulators would rather leave undisturbed like a stagnant toxic reservoir.

At the less pernicious end of the seductive a cappella temptations of ripened greed are those who suspected that Madoff was doing something off the main line to deliver such absurdly consistent returns. As is often the case on schemes too good to be true, these investors didn’t really want to know. They invested anyway. Smaller fish begged Madoff to accept their capital for investment, but many were likely directed there by their own financial consultants who received some form of compensation from the virulent fund. This is not to suggest that the whole system is corrupt, however, a considerable portion in the financial consulting and capital management business, have forever acceded to beguilement and dipped their buckets into both sides of an investment transaction.

Nearer the apex of the pecking order are market savvy managers of large capital pools who accost both sides of financial transactions in monastic secrecy and with ascetic prudence. The nature of their game can get complex, and presents a kaleidoscope of diversity. While overseeing funds or pools owned by others worth tens, even hundreds of billions, they manage their own private smaller but nevertheless sizable funds. One can scale down numbers applied to the graft, however the same ceremonial congruity applies. Regardless what long, short or other more eclectic bet is made from the large fund under management, the smaller private fund can be insinuated into the safe side of the transaction between the bid and ask, for example. The smaller private million-dollar insertion will be guaranteed warmth by the bigger trades on behalf of the larger managed funds. Execution can avert prying eyes with or without broker or market maker accommodation, utilizing Byzantine devices such as well nested off shore accounts, although many operate subtly but in full view.

The investment game is prodigally encumbered with inducement for manipulation or corruption, imploring those weak of fortitude, morals and principals to abide to discrepant customs. When managing “someone else’s money” it is too easy to take a piece over and above the agreed-to fees. Rationalizations abound sanitizing the egos of corrupt investment bankers convinced they are the requisite Eustachian tubes of the investment world. Attempt to calculate odds of graft in this industry would accelerate the most complex algorithms into catharsis. We are treated to many great lies, such as “the market never lies,” or “insider trading is illegal,” meant to administer salve to the flock, or anaesthetize the unsuspecting.

What self-respecting investor, broker, market maker, fund manager or general purveyor of financial clout would make an investment without “inside” information? Martha Stewart was jailed for a minor incarnation of that infraction. Occasional immolations are inevitably imposed for the industry’s aesthetics to maintain consecration. Madoff is no recent proselyte to the game, having founded his firm in 1960 and having served as Chairman of NASDAQ, his breadth of experience should deliver unusual enlightenment into the darker corners of his industry during these times of bailouts and deficits. It will then be up to Congress to act on reducing the odds of seduction.

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• THE ROAD TO PANIC – GET OFF

Ten days traveling up and down the West Coast proved to me that the intent of those controlling the Wall Street joystick, with help of many ever-so-willing media pundits, failed to instill Panic and Fear in minds of most Americans. Concerns? Yes. Panic? Not so much.

Taxpayers have been hit with a hurricane of bad news, and have even been threatened with promises that if trillion dollar bailouts were not implemented overnight, the whole financial system of the U.S. and possibly the world, might collapse. The American economy is not failing, and unemployment is at a rate most other countries are envious of.

Since the real problem rests with lenders or repackagers of home loans that can’t be repaid, is anyone telling America’s taxpayers how much these losses really represent in total? No. Is it really almost a trillion dollars, or is it really much, much less? Is anyone asking where all this money went? When a house sold, affordable or not, someone cashed that check. Why are taxpayers told that Treasury Secretary Hank Paulson needs to be given a blank check because only he will be able to do what is right, and he will know what backstops will be needed to provide a soft landing to this calamitous financial unraveling? Did he do what was right when he was head of Goldman Sacks for six years? Is it that he should be respected because he made almost a billion dollars as CEO of Goldman Sacks? His power and dominance continue their trajectory, and if he is given a carte blanche on access to taxpayer’s money, we can expect more abuse. Providing even more latitude to the likes of Goldman Sacks to become banks, is simply a knee-jerk reactive agreement to further consolidation of power.

Congress is not stepping up to the plate and neither are the two Presidential Candidates who are too busy flailing on the stump. If this is really the calamity we are all being led to fear, then all should be in Washington, coming up with immediate solutions. Bailouts are not solutions, just like band-aids are not a cure.

Don’t believe the panic-button pushers. Panic misleads, and it blinds those led to panic from seeing reality, or discerning appropriate action. Panic also leads to extreme swinging of pendulums that create new problems rather than resolve old ones.

It remains that America is a country that billions of people wish they could live in. America is the country that people have confidence in and whose environments they wish could be replicated. Its environment stimulates the entrepreneurial spirit that is further fueled by its creativity. It is also the only country that all capital gravitates toward when it is seeking security. The economic fluctuations, even those such as the ones we are currently witnessing or getting hurt by, caused by abuse or bad management, or even from errors in judgment, are risks accepted by those whose cash is seeking safe harbor. Transparency is one aspect favoring foreign investments in America, however, it is not the principal one. The overriding element is America’s power and international presence.

Whether you are a dictator in Africa, or an oil monarch pillaging your country’s wealth, or a foreign government fund, you will always place a significant portion of your cash where it is safe. America will print more dollars because it can, and it will have a market for them. The doomsayers all make money somehow, somewhere in the game, or just repeat nonsense they’re been fed. There are also those who feint left, then go right. Remember Goldman Sachs’ forecast that oil was heading to $200 a barrel when it was kissing $150? The price immediately caved in following their announcement. Were they looking for fish onto which to dispose of positions? This is no time to panic. Tighten up the belt a little, and save a few dollars. Middle America will ride this out in spite of its Wall Street leaders. However, American taxpayers should make sure their representatives in Washington take action on oversight, and implement some visible house cleaning, punishment on those responsible for the outlandish abuse.

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• CORPORATE ETHICS

There are few more confusing or idiotic idioms than "It's not personal, it's business". We like to think all corporations are ethical while we feel safe in the knowledge that the "Enrons" will somehow surface and be severely punished. No such luck.

Apply the 80/20 rule and what do you have? 20% of companies are ethically run, managed by individuals whose ethics are exemplary. That leaves the other 80% mired in the grey quagmire of dubious ethical principles and morals. Some go right over the edge and get caught. Most don't.

This is still less annoying than knowing that the Gulf of Mexico now has a massive "dead zone" whose roots lie as far upstream as the farms around the head waters of the Mississippi River where millions of tons of fertilizers, insecticides, fungicides, herbicides etc leach into the soil. There are natural alternatives to enriching soil but farmers would never put anything on their lands that the Monsantos, Duponts or Dows haven't approved of. Who can blame them. Many of us would all do the same if the alternative to survival was "no market for your crop".

Does anyone question a mining company's obnoxious and reprehensive contamination of an Indonesian river as long as it's being done profitably? We might care a little, but not enough to be as outraged as so many of us seem to become when we learn of Enron executives building castles with proceeds resulting from fraudulent financial schemes implemented with great dexterity.

The heads of tobacco companies standing in front of a Senate hearing, sheepishly copping to having known and denied the impact of nicotine on human health is an image we have all witnessed with some degree of helplessness. How could whole organizations have lied and perverted evidence as a matter of corporate governance.

Where is the ethical leadership when the head of one of the world's largest internet based companies gets bought' by Wall Street brokers, then excuses it with "Well, everyone else does it". We then watch as the company makes peculiar financial acquisitions making the brokers hundreds of millions. Egos and greed sometimes have no bounds.

Can we all sleep soundly knowing that the Sarbanes-Oxley Act passed into law in 2002 to give the government real teeth to go after potential "WorldCom's"? Hardly. Such occasional bureaucratic oversight of accounting firms simply means that when you "cook the books" make sure that the corporate Board Of Directors approved it. Most abuse flies under the radar. Is any corporate board ever charged. It is also Only when there is a major disintegration of investor equity that anything really comes to public attention and action is taken, not because there is an ongoing ecological or human health disaster in the making.

Oversight is not a satisfactory answer. The answer lies in education . It lies in the infusion of consideration and sensitivity for our fellow human beings, not just ourselves. Ethical behavior is the application of basic common sense and should be practiced by all corporate citizens, with the more influential ones taking the lead.

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